Economic opening

economic-dictionary

Economic openness is a strategy by which countries eliminate or substantially reduce their barriers to international trade and foreign investment.

In other words, the objective of economic openness is to reduce obstacles to the exchange of goods, services and capital between different countries. The idea is to promote free competition, facilitating the entry of foreign competitors. In addition, it seeks to encourage the entry of human talent and assets from abroad.

Characteristics of economic openness

The main characteristics of an economic opening process are the following:

  • Reduction (usually progressive) of artificial barriers to international trade such as tariffs, quotas, excessive regulations, bureaucracy, prohibitions, etc.
  • There is no price control.
  • The State does not intervene in the competition between national and foreign products.
  • Those subsidies or aid that sought to protect the national industry are reduced or eliminated.
  • Reciprocal treatment with the counterpart is expected, although the opening can also be unilateral. In other words, if country A reduces its barriers to producers in country B, that nation would be expected to do the same.
  • The State has a subsidiary role, that is, of support or intervention, and only in the case that we are not facing an efficient market.
  • Economic openness can be generalized, focused on certain markets / products, with the rest of the world or with a group of selected countries.

Protectionism versus openness

The opposite of open trade is protectionism. This strategy consists of protecting national producers by making it more difficult and expensive for foreign competitors to enter the local market.

Furthermore, protectionism tends to provide subsidies and other aid to the national industries it seeks to favor.

Benefits of economic openness

Economic openness has various benefits derived from competition between different actors at the global level. These advantages include:

  • Greater variety of products and options for consumers.
  • Lower prices (the result of greater competitive pressure).
  • Local companies are forced to be more competitive and efficient.
  • The State will spend less to protect the national industry. In this way, it can have more resources to allocate to other objectives such as promoting the efficiency of the government itself or helping the most needy sectors (those with lower incomes).
  • Resources are best used globally. Countries can better exploit their comparative advantages. To understand this, suppose that a country is not efficient in the automotive industry. Then you will not have to produce vehicles, but will be able to import them.

Disadvantages of economic openness

However, economic openness can also have disadvantages:

  • Local producers may see their sales affected by the supply of cheaper foreign products.
  • Continuing with the above, if some national companies go bankrupt due to the fall in their income, unemployment may rise in some sectors.
  • Another disadvantage of economic openness is that it increases external exposure. To understand this point, let's imagine that country A relies heavily on its copper shipments to country B. Then, if the latter faces a slowdown in its economic growth, it will buy fewer metals, affecting country A's exports.

Ways to avoid the negative impacts of opening

Trade openness can affect local businesses. However, the national industry can improve its competitiveness or redirect its resources to activities where it is more competitive.

On the other hand, it is true that periods of unemployment can appear, but adjustments must be made so that workers specialize in other more profitable areas of production.

For example, if textile activity in country A is inefficient and unable to compete with country B, its employees may find themselves unemployed. However, this human capital could be relocated to other national industries that are competitive.

For this to happen, education and training must be provided. Furthermore, textile workers from country A eventually also have the possibility to move to another nation (for example, B) where their qualities are better utilized.

The State can help make this process more fluid and periods of unemployment are reduced to the minimum possible.

Tags:  Business economic-dictionary finance 

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